Weltpolitik Blog: Japan's quest for Bigger Oil

by Hisane Masaki

Japan's Inpex Holdings Inc marks one year on Tuesday since it was established through the government-engineered merger of Inpex Corp and Teikoku Oil Co, the nation's No 1 and No 3 developers respectively.

Reflecting the government's strong desire to see Japan's largest oil and natural-gas developer become even more powerful than rival international oil majors, Inpex Holdings, founded on April 3, 2006, as a holding company of the two developers, has been aggressively expanding its overseas business in the past year. Its chairman said recently that it will spend more than 200 billion yen (US$1.7 billion) annually to explore and develop oil and gas fields over the next three to four years.

Increasingly concerned about its medium- and long-term energy security amid stubbornly high prices - and intensifying global competition - for oil and gas, resource-poor Japan has set an ambitious goal of boosting the ratio of "Hinomaru oil", or oil developed and imported through domestic producers, from the current 15% to 40% by 2030.

To achieve that goal, the government has begun to pump no small amount of public funds into private-sector efforts to secure oil, gas and other interests abroad. Two significant public financial measures - a new type of trade and investment insurance scheme and increased investment in private-sector projects - are available from the current fiscal year, which started on April 1.

Ensuring stability of supply is a matter of life or death for the world's second-largest economy. Japan imports virtually all of its oil, with nearly 90% of that coming from the volatile Middle East. It also buys almost all of its natural gas from abroad, making it the world's largest importer of liquefied natural gas (LNG).

However, whether Japan will be able to have a powerful developer to rival international oil majors is widely seen as holding the key to achieving the 40% target for Hinomaru oil. The Japanese government, Inpex Holdings' biggest shareholder with a stake of nearly 30%, still believes the holding company is too small to compete with powerful foreign rivals. So what will come next?

More public funds

Highly alarmed by high oil prices and the red-hot global rush for energy resources led by China and India, Japan's Ministry of Economy, Trade and Industry (METI) adopted last May a new strategy aimed at ensuring stable energy-resource supplies in the medium and long terms. The New National Energy Strategy calls for, among other things, securing energy resources abroad through the fostering of more powerful domestic energy companies, with the ultimate goal of boosting the ratio of Hinomaru oil to 40% by 2030. It also calls for strengthening relations with resource-rich countries through such measures as official development assistance and free-trade agreements.

To achieve the numerical target for Hinomaru oil, the New National Energy Strategy stresses the importance of "drastically strengthening the supply of risk money" related to the exploration and development of overseas oil and natural-gas reserves by domestic development companies. In this connection, the document specifically emphasizes the need for Japan Oil, Gas and Metals National Corp (JOGMEC) and other government-affiliated organizations to play the role of an effective risk-money supplier.

In line with the METI-adopted strategy, Prime Minister Shinzo Abe's cabinet approved a new basic energy plan early last month as a guideline for energy-policy implementation over the next decade. The new plan, which replaced the old one approved in 2003, calls for, among other things, greater government involvement in efforts to secure energy interests abroad and the promotion of nuclear power generation.

On Sunday, the government-affiliated Nippon Export and Investment Insurance (NEXI) began to accept applications for a new type of trade and investment insurance scheme to cover possible losses incurred in overseas energy-development projects by Japanese corporations due to natural disasters, accidents and political or terrorist acts.

The new product will be offered with much lower premiums - up to 75% lower - than ordinary trade and investment insurance to encourage the nation's private firms to undertake energy developments overseas and help them survive in the tough global competition for oil, natural gas and other energy-resource interests.

The government will act as the reinsurer for the new product, dubbed "comprehensive natural resources and energy insurance". With its involvement in the new program, the government hopes to protect domestic companies from being unilaterally stripped of their interests by host countries. The combined maximum amount of undertakings has been set at 300 billion yen.

Meanwhile, JOGMEC, another government-affiliated body, will raise, from the current fiscal year, its investment in promising exploration projects being implemented by domestic firms abroad to a maximum of 75% of the total investment amount from the previous 50%. Like NEXI's new trade and investment insurance scheme, JOGMEC's greater investment is designed to encourage often risk-averse domestic firms to venture into high-risk projects abroad.

Until last year, the government had shied away from getting deeply involved in risky exploration projects abroad, in the wake of its much-criticized blunder over now-defunct Japan National Oil Corp (JNOC). The government's recent strong backing for domestic energy companies engaged in foreign exploration and production of oil and gas marks a clear policy reversal.

JOGMEC was established in early 2004 as a successor to state-owned JNOC, which was set up in the 1960s to pioneer Japan's drive to boost energy security. JNOC was disbanded after piling up an immense amount of debt through loans and investments - worth a total of about 2 trillion yen - to help domestic firms participate in many wasteful exploration projects abroad.

Two years after JNOC was formally disbanded in April 2005 and amid growing national energy-security concerns, many Japanese government and industry people now ask: Was it really necessary to disband the organization, which played a key role in securing oil and gas interests for Japanese firms abroad?

Although JNOC was disbanded after racking up huge debts, internal government documents compiled last year show that because of current high oil prices, the national company now would have been a highly profitable entity, with more than 700 billion yen ($6 billion) in latent profits. JOGMEC inherited some operations of JNOC, but unlike JNOC, JOGMEC's functions do not include information gathering and intermediation for domestic firms. However, there is at least one thing JOGMEC will do more than JNOC. Even JNOC's investment in exploration projects being implemented by domestic firms was limited to 70% of the total investment.

Meanwhile, JOGMEC signed a basic cooperation agreement with Brazilian state-owned oil company Petrobras on March 20 for the joint exploration and development of oil and gas fields in Southeast Asia and South America. Special emphasis will be given to deepwater projects. JOGMEC and Petrobras agreed to hold annual meetings to exchange relevant information and identify international projects of mutual interest.

The government-affiliated Japan Bank for International Cooperation (JBIC), one of the world's biggest international financial institutions, is also revving up its energy-related business activities. In the past year, JBIC has signed comprehensive partnership agreements with the governments, state-run oil and gas firms or other related organizations of many resource-rich countries, including South Africa, Indonesia, Brazil, Oman, Qatar, Brunei, Uzbekistan and Kazakhstan, in hopes of ensuring stable supplies.

On March 26, JBIC also signed a loan agreement totaling up to $170 million with Inpex Offshore North Campos Ltd, a joint-venture firm among Inpex Corp, Sojitz Corp and JOGMEC, to support its development of the Frade Block off the shores of Campos, Brazil, in cooperation with Chevron Corp and Petrobras. The loan is co-financed with three of the biggest Japanese banks - Mizuho Corporate Bank, the Bank of Tokyo-Mitsubishi UFJ, and Sumitomo Mitsui Banking Corp.

"This is the first oil-development project in which a Japanese firm has a concession right in Brazil and crude-oil production is realized," JBIC said in a statement. "The project will thus contribute, as an independent development project, to the securing and stable supply of energy resources to Japan."

Investment spree

Inpex Holdings has been barreling ahead, except for a hitch in Iran, where it lost its controlling interest in the $2 billion development of the massive Azadegan oilfield last autumn amid international tensions over Tehran's nuclear program. Inpex Holdings reduced its stake in the oilfield from 75% to 10%. Officially, Inpex Holdings maintained that the deal went awry because of insufficient efforts by Tehran to de-mine the project area on the border with Iraq, but the firm was widely believed to have reduced its stake in the oil project in the face of formidable US pressure on Japan.

Inpex Holdings has been aggressively expanding its overseas business in the past year, acquiring new interests and starting production at its existing fields. Last June, an international consortium that includes Inpex Holdings, Chevron Corp and others decided to invest up to $2.4 billion to begin commercial production of crude oil in a field in Brazil's Frade Block. Production is expected to begin in April 2009 with a daily output of 100,000 barrels. The field has about 300 million barrels of recoverable crude.

The Baku-Tbilisi-Ceyhan (BTC) pipeline linking Azerbaijan to Turkey began shipments from a Turkish port last June. The multibillion-dollar pipeline was constructed by an international consortium including Inpex Holdings and another Japanese firm, Itochu Corp. Inpex Holdings and Itochu have stakes in the BP-operated Azeri-Chirag-Gunashli (ACG) field in the South Caspian area of Azerbaijan, of 10% and 3.92% respectively.

Meanwhile, a group of companies running Kazakhstan's massive Kashagan oilfield is conducting a feasibility study into a $4 billion transportation system that would take the field's oil to the BTC pipeline. In addition to operator Eni SpA, the consortium developing the field includes ExxonMobil Corp, Royal Dutch Shell PLC, Total SA, ConocoPhillips, Inpex Holdings and KazMunaiGaz. Eni, ExxonMobil, Royal Dutch Shell and Total have larger shares than the other partners, each with 18.52%. Inpex Holdings has an 8.33% interest in the Kashagan oilfield.

With proven reserves of more than 13 billion barrels, Kashagan is considered to be the largest discovery in 30 years. Oil output at the field had been originally targeted to start in 2005, but that date was revised to 2008. Eni recently confirmed investors' fears about further delays and cost overruns and said the Kashagan oilfield won't begin pumping until the second half of 2010, a full two years later than had previously been claimed.

Last August, Inpex Holdings and Nippon Oil, Japan's largest oil wholesaler, announced an agreement to increase their cross shareholdings with an eye on launching joint oil developments. Inpex Holdings now holds a 1% stake in Nippon Oil, while the latter has a 4.28% stake in the former.

Last December, Inpex Corp and Mitsui Oil Exploration Co jointly won a license for an oil block in Libya, in which the Inpex Holdings subsidiary, an operator, has an 85% stake and Mitsui has 15%. The 113-3/4 block is near Libya's western border. Inpex Holdings has stakes in three other blocks in Libya. In October 2005, Inpex Corp acquired the 42-2/4 block jointly with Total, while Teikoku Oil Co, which was still independent at the time but merged with Inpex Corp later, acquired the 81-2 and 82-3 blocks jointly with Mitsubishi Corp.

Most recently, a consortium comprising Total and Inpex Corp was awarded the South East Mahakam offshore exploration block in the Mahakam Delta, off East Kalimantan in Indonesia, early last month. Inpex Corp has a 50% participating interest in the block and Total is the operator with the remaining 50% interest.

Inpex Corp has interests in several other blocks in Indonesia, including a 100% interest in the Masela block in the Timor Sea. Inpex Corp is also participating in the development of the Berau block, a principal block in the multibillion-dollar BP-led Tangguh LNG project. Japanese firms have a combined stake of 45.88% in the Tangguh project, with MI Berau BV, a joint-venture company between Inpex Corp and Mitsubishi Corp, owning 16.3%.

In Australia, Inpex Holdings is participating in the development of several blocks through its subsidiary Inpex Corp, including Block WA 285-P, off northwestern Australia, which contains the Ichthys gas field. Discovered in 2000, the field is estimated to hold at least 6 trillion cubic feet of gas. Inpex Corp acquired minority interests in a few other Australian blocks last year.

Inpex Corp originally owned a 100% interest in Block WA 285-P but sold a 24% stake to Total last year. The transfer became effective last November after getting the Australian government's approval. The $6 billion Ichthys LNG project is scheduled to begin construction in 2009 and start operating in 2012. For the project, Inpex Corp may offer part of its 76% stake in the venture to Japanese power and gas utilities that may buy LNG from the project, Inpex Holdings chairman Kunihiko Matsuo was quoted as saying.

Another shakeup?

Inpex Holdings was created by putting Inpex Corp and Teikoku Oil Co under its umbrella. The holding company has been conceived in effect as a "national policy corporation" designed to secure supplies for Japan from abroad. The government believes that the combined firm's greater size will better serve this purpose.

METI, Inpex Corp's largest shareholder, with a 36% stake, played a key role in the marriage of the two developers, hoping to foster a more powerful entity to compete with foreign rivals. Inpex Corp absorbed another government-affiliated firm, Japan Oil Development, in 2004. Teikoku Oil Co was also originally established by the government. The government now has 29.3% of Inpex Holdings.

The government holds sway through the presence of former METI officials in top posts, as well as through its unrivaled equity stake. Chairman Matsuo is a former chief of the METI-affiliated Small and Medium Enterprise Agency, and its president, Naoki Kuroda, is a former head of the also METI-affiliated Natural Resources and Energy Agency. Matsuo and Kuroda still concurrently serve as chairman and president, respectively, of Inpex Corp, the posts they have held since before the establishment of Inpex Holdings.

The new basic energy plan approved last month stipulates that fostering an internationally competitive developer has become a "decisive factor" in ensuring energy security. As things stand now, however, the holding company of Inpex Corp and Teikoku Oil Co is still nowhere close to becoming an oil major that can match US and European giants.

Inpex Holdings currently produces about 400,000 barrels of oil per day. This amount is not only dwarfed by the outputs of any of the five biggest oil majors - ExxonMobil, BP, Royal Dutch Shell, Total and Chevron - but pales before even those of the smaller international oil majors. Eni of Italy, for example, produces about 1.7 million barrels of oil per day, an amount more than four times Inpex Holdings'.

The Japanese government wants Inpex Holdings to become a much bigger player on the global stage. The shortcut to realizing the dream is further consolidation of government-dominated developers. In fact, the government plans to transfer its 50% stake in Sakhalin Oil and Gas Development Co (SODECO) to Inpex Holdings in the future. SODECO, a consortium of the Japanese public and private sectors, is participating in the huge ExxonMobil-led Sakahalin-1 project in Russia's Far East, with a 30% stake.

Even the future merger of Inpex Holdings and Japan Petroleum Exploration Co (JAPEX), another major Japanese developer, cannot be ruled out. JAPEX is 49.9% owned by the government. JAPEX president and chief executive officer Yuji Tanahashi is a former METI official who rose to the top bureaucratic post of administrative vice minister. Some industry observers believe that the biggest obstacle to the possible merger of the two developers is the personal rivalry between Matsuo and Tanahashi, both of whom joined METI - which was then called the Ministry of International Trade and Industry - as career bureaucrats in 1958.

Asian Times